Gene Weingarten, whose work I normally love, is currently running an inane campaign to get people to stop reclining their seats in economy class on airplanes. He’s even put together a passive-aggressive card that you can hand to your fellow passenger, scolding him for being so rude as to recline.

Sorry, Gene. The property rights in reclining a seat belong to the person who is sitting in it. I will recline if I please.

Of course, if Weingarten really hates sitting behind someone who is leaning back, he already has an option: he can pay his fellow passenger to agree to keep his seat upright. This is a straightforward application of the Coase theorem, which Wikipedia summarizes as follows: “if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.”

It’s hard to think of a more tradeable externality than this one: while pollution can have negative effects on millions of people, there are only two parties to the question of whether an airline seat should recline, and they are sitting three feet away from each other.

Simply put, that debate is all about health-care entitlements. And I mean all. Last month, the Congressional Budget Office released its most recent long-term outlook document (from which the chart above is taken), and with it they released the underlying data tables they used to produce their projections (which you can find here). Here’s a quick chart based on those tables, showing the components of federal spending over the coming decades:

The Breaking Point Posted by Lance Roberts on Tuesday, 19 July 2011 19:47

From the 1950’s through the late 1970’s interest rates were in a generally rising trend with the Federal Funds rate at 0.8% in 1954 and rising to its peak of 19.1% in 1981. When the economy went through its natural and inevitable slowdowns, or recessions, the Federal Reserve could lower interest rates which in turn would incentivize producers to borrow at cheaper rates, refinance activities, etc. which spurred production and ultimately hiring and consumption.

As the economy recovered and began to grow again the Fed would need to raise interest rates. This program seemed to work fairly well as interest rates went to a level higher than the last as the economy grew at an increasingly stronger level. This provided the Federal Reserve with plenty of room to maneuver during the next evolution of the business cycle.

However, beginning in 1980 that trend changed with what we call the “Breaking Point”. We are not entirely sure what created this breaking point specifically whether it was deficit spending by the Reagan Administration to break the back of inflation, deregulation, exportation of manufacturing and a shift to a serviced based economy, or a myriad of other possibilities or even a combination of all of them. Whatever the specific reason; the policies that have been followed since the “breaking point” have continued to work at odds with the “American Dream” to the benefit of Wall Street.

America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff. We aren’t talking about “namby pamby” stuff – we are talking about real stuff. We used to produce everything from automobiles to steel to blue jeans; right here in America. We ran telephone lines, built roadways and bridges, drilled for oil and constructed buildings. It was the sweat of the brow and the strain on the back that built America into its former shining self. A country made up of opportunity and prosperity with a solid moral foundation and a strong military to back it up.

That was then. Beginning in 1980 our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of successful use of leverage. However, what we didn’t realize then, and are slowly coming to grips with today, is that financial engineering had a very negative side effect – it deteriorated our economic prosperity.

Industry clusters: The modern-day snake oil

The formula for creating these clusters is always the same: Pick a hot industry, build a technology park next to a research university, provide incentives for businesses to relocate, add some venture capital and then watch the magic happen. But, as I have noted before, the magic never happens. Most of the top-down cluster-development projects in the United States and around the world have died a slow death in relative obscurity. Politicians who held the press conferences to claim credit for advancing science and technology are long gone. Management consultants have cashed in their big checks. Real estate barons have reaped fortunes, and taxpayers are left holding the bag.

….

Harvard Professor Michael Porter’s outdated cluster theory lies at the heart of what is wrong with these common prescriptions. He observed that geographic concentrations of interconnected companies, specialized suppliers, and service providers gave certain industries a productivity and cost advantage. His legions of followers postulated that by bringing these ingredients together into a “cluster,” regions could artificially ferment innovation. They just needed to build the right infrastructure and bring together chosen industries.

A recent analysis of 1,604 companies in the five largest Norwegian cities underscores what’s missing from this prescription for a knowledge economy: people. The prerequisite for a regional innovation system is knowledgeable people who have the motivation and ability to start ventures. To succeed, these people need to be connected to one another by information-sharing networks. Basic infrastructure is always needed, but fancy science parks and big industry are just nice to have.

The following chart shows the trajectory of spending by the Departments of Defense and of Health and Human Services across the past 50 years, as well as their projected spending across the next five years, according to the White House Office of Management and Budget (see Table 4.2):

Wednesday, July 06, 2011

By taking into account previously unmeasured shifts in household size and the tax units in them, taxes paid, transfer payments received, and the increasing importance of fringe benefits, the researchers find that the growth in after-tax household income has been substantial not only for the middle class, but for all income groups over the last 30 years.

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America.
I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.